This is why financial planning and investment management should not be separated.
I’ve heard people say:
“Just pair tax‑inefficient investments with strategies that realize deductions and it all nets out.”
In theory, that sounds fine.
But in practice, it often misses the bigger picture.
Having an ordinary deduction in a portfolio does not automatically mean it’s optimal to stuff a taxable account full of ordinary‑income investments.
My typical order of operations:
- Use ordinary deductions against earned income
- When retired, use them against Roth conversions
- Only after IRAs are fully converted to Roth→ consider adding more taxable income in the brokerage account to pair with those deductions
Why?
Because every dollar of taxable income you unnecessarily create in the portfolio is one less dollar of earned income or Roth conversion you can offset.
And if someone really needs / wants income, there are plenty of tax‑efficient ways to do it:
- Real estate with depreciation
- Securitized affordable‑housing loans
- No‑distribution ETFs with capital gains treatment
- Traditional muni bonds, etc.
There’s rarely a good reason to introduce investments that increase your AGI just because you “have deductions.”
You simply cannot build an optimal investment portfolio without understanding the rest of the equation:
- Projected income over the next 3–5 years
- Stock‑based compensation
- Current IRA/401(k) balances
- Desired retirement date
- Cash‑flow and liquidity needs
- Estate and legacy goals
That’s why comprehensive planning and portfolio design have to be done together. Anything less is guesswork.